This is how Trump makes taxation great again - December 10, 2017

The US Senate passed its own version of tax reforms that almost halves corporate tax rates. The bill also clarifies the details of repatriation tax, which encourages international giants to bring home their money kept abroad. But the new rules are far from perfect.

Both the House and US Senate passed its own version of the long-awaited American tax reforms, which is the biggest revision of the bill in decades. Although there are some differences between the two versions which have to be united, the main details are now known. But can Trump’s leadership fix the USA’s biggest tax problems?

The main problems

According to Donald Trump and the Republicans, the main problem with taxation was that corporate taxes were too high in general. This slowed down economic growth and companies left the US for more preferable (sometimes offshore) locations. Another serious problem was about personal taxes: Republicans believed that people themselves pay too much tax, so they are trying to ease their problems as well.

However, Independent critics – and Democrats – are saying that these cuts not only would add a $10 trillion deficit to the budget over 10 years (even with the growth Republicans expect), but they also help giant companies and the already rich instead of the poor.

Low corporate taxes

Against all criticism, the bill was passed and the corporate tax cut can now be a reality. Up until now, US corporate tax was around 35% which – if everything goes to the Republican plan – will be 20% in the near future. That really is a serious cut, and may be able to make the US a more attractive place to do business for companies that left the country before.

Some companies are already planning to bring back their production to US soil for other reasons: workforce is getting more expensive in countries like China. Automation in the meantime is more capable every day, making it possible to use robots instead of people at a growing number of jobs. This, combined with a simpler and cheaper taxation may really be attractive.

Money kept abroad coming home?

There is another American problem, which needs an answer: money kept abroad. S&P500 companies alone keep $920 billion in other countries, while all companies’ money totalling up to $2.5 trillion. Governments are trying to make them bring this money back, but so far without success. The Senate voted for a repatriation tax rate for the money brought back: 14.5% for cash and 7.5% for other profits.

This is an important step, but a lot higher than it was expected before, at a rate around 10%. This may discourage companies to bring back their money to US soil again. It’s also 0.5% higher than what was voted by the House. But the Senate needed to answer the serious hole in the budget we mentioned above, and with this small raise they were able to add at least some billions to try to keep the balance. Which will be an important thing to keep an eye on in the future.

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